Gravy train picks up United management

Silicon Valley-style gains on stock awards await airline's executives

Managers who helped pull United Airlines out of its tailspin and into a merger with Continental Airlines are in line for a windfall of the size usually associated with IPOs of high-flying tech companies.

Potential gains exceed $100 million in aggregate for about 225 United bosses—from top executives to middle managers—who got millions of stock options and restricted shares as an incentive to stick it out through the depths of the recession. Issued when United was strapped for cash and battling to avoid a second trip through Chapter 11 bankruptcy proceedings, the awards soared in value along with the company's stock price over the past year.

“It's almost like an IPO,” says Mark Reilly, a compensation expert at Chicago-based 3C. “It happens a lot in technology mergers, but not in many other industries.”

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The gains cushion the blow for United managers who will lose their jobs in the merger and give those who remain a head start in reaping a financial benefit from the deal. But the payday for executives could fuel resentment among union workers angry over concessions made during the airline's bankruptcy reorganization and determined to get money back in ongoing contract talks.

Many such workers believe they were shortchanged while “management came out of bankruptcy with fat equity packages,” says Corey Rosen, CEO of the National Center for Employee Ownership in Oakland, Calif. “So if (managers) can go ahead and make a killing on them now, it would only make things worse.”

A United spokesman says: “Since the depths of the recession in 2009, United's employees, customers and its shareholders have all benefited from the company's operational and financial performance improvements.”

United granted 2.5 million options and 1.8 million restricted stock awards in April 2009, when its stock was trading at $4.86. Although the awards were to vest in equal annual installments over three years, the merger accelerated that schedule so that all vested when the deal closed Oct. 1.

About 20 top executives who will remain at the company—including Chairman Glenn Tilton—signed retention agreements waiving acceleration of their equity awards. In return, United agreed to lock in the value of their restricted stock awards at merger prices, with payments to be made according to the original vesting schedule. The profit on their options depends on the price of United's shares when they are able to exercise them.

Some United executives already have benefited from the airline's turnaround, which started in late 2009. When one-third of the stock options granted last year vested in April, shares were trading at about $20, indicating potential profits of about $12.7 million in total. Securities and Exchange Commission filings show senior executives including Mr. Tilton and Pete McDonald, chief administrative officer, realized total gains of $3.5 million on options priced at $4.86 a share, but there's no way to know how many employees cashed in. The remaining options are worth $36 million at United's closing stock price of $26.44 on Friday.

About 567,000 restricted stock units also vested in April and were settled in cash at $19.55 per share, generating $11.1 million overall, including $1 million total for former President John Tague and former Chief Financial Officer Kathryn Mikells. Other restricted stock— including some granted prior to 2009—vested on the merger's closing at a total of $43.4 million.

The gains for United executives far exceed payouts their counterparts at Houston-based Continental can expect from stock options as the carriers merge. Similarly, the merger of Delta Airlines Inc. and Northwest Airlines Corp. in 2008 produced no such windfall.

Like most companies, United concentrated its stock awards among senior executives. The top five executives received about 30% of the options and restricted stock granted in April 2009. For most managers, options and restricted stock grants might be worth 25% of their annual salary.

Because of the retention agreements, United estimates that vesting of only one-third of the unvested options from 2009 was accelerated by the merger. Executives with accelerated options must decide whether to cash out or hang on to their shares in hopes the merged airline, now the world's largest, will soar higher. But the fortunes of airlines are notoriously turbulent. United's stock seesawed in the past three years from a high of more than $50 to lows of about $3 before recovering to the current level.

“I'd bet ($26) may look like a pretty good price right about now,” says Don Delves, president of Delves Group, a Chicago-based compensation-consulting firm. “You'll probably sell a significant part and diversify unless you think there's some terrific upside. But what airline has had a terrific upside in the past 30 years besides Southwest?”

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The gains for United executives far exceed payouts their Continental counterparts can expect.